Reflecting new domestic concerns about overcapacity, PRC regulators have added more industries to the list of sectors in which they aim to curb production. Given the range of sectors and products affected, the impact of efforts to curb overcapacity on companies may vary, with some companies facing longer waits for project approvals, supply chain disruptions, and more stringent environmental impact assessments.

In late May, PRC Minister of Industry and Information Technology Li Yizhong called on local governments to take specific measures to curb production in 18 industries. Regulators are targeting energy-intensive and highly polluting enterprises in industries such as raw materials, chemicals, and industrial products to meet energy reduction and emissions targets set in the Eleventh Five-Year Plan (FYP, 2006-10).

China is lagging in its efforts to reduce energy intensity per unit of gross domestic product by 20 percent by the end of 2010—a target set in the 11th FYP. To help achieve this goal, the State Council in April released the Notice on Strengthening Work on the Elimination of Backward Production Capacity, which sets targets and timelines for eliminating production capacity in major industries:

  • Thermal power  Eliminate more than 50 million kW of electricity generated by small thermal power plants by the end of 2010.
  • Coal  Eliminate more than 8,000 small coal mines (amounting to 200 million tons) that are deficient in safety standards, highly energy-intensive, or environmentally harmful by the end of 2010.
  • Coal-to-chemical  Shut down small coking coal makers with a coking chamber height of less than 4.3 m by the end of 2010.
  • Ferrous alloys  Begin phasing out mill furnaces below 6,300 kilovolt-amperes in the ferrous alloy and calcium carbide sectors by the end of 2010.
  • Steel  Close all steel furnaces smaller than 400 m3 by the end of 2011.
  • Nonferrous metals  Eliminate the use of outdated production techniques in the nonferrous metal sector.
  • Construction materials  Eliminate the use of shaft-kiln cement mixers with a diameter of 3 m or less, and dry kilns smaller than 2.5 m in diameter, by the end of 2012.

The State Council notice calls upon 18 ministries and agencies to develop policies to curb production in affected industries. Regulators are encouraged to craft polices that

  • Support or strengthen existing laws, rules, and technological standards;
  • Deploy market mechanisms, such as increasing land prices for projects in the marked industries;
  • Use administrative mechanisms, such as suspending project approvals;
  • Increase administrative penalties and incentives; and
  • Enhance supervision and coordination among involved bureaus and agencies.

Central ministries and offices must instruct their provincial and local-level offices to carry out policies accordingly. If enterprises do not comply with the local restrictions, local banks and financial institutions must deny the enterprises access to new loans, lines of credit, and other financial assistance. Likewise, local offices of the Ministry of Land and Resources may not approve additional requests for new land permits from noncompliant enterprises. In extreme cases, local regulators must cut companies’ power supply.

China’s efforts to address overcapacity continue

In September 2009, PRC regulators embarked on a multi-agency campaign to curb overcapacity in 10 industries, six of which are still being targeted. Much of the overcapacity stemmed from the inefficient allocation of fixed-asset investment attached to the PRC government’s ¥4 trillion ($585 billion) economic stimulus package and excessive lending from commercial banks.

The most recent government effort has some distinguishing features. First, the mix of industries is much less diverse. Regulators are focusing on nonferrous metals, raw materials, and related sectors, unlike when sectors such as wind power and polycrystalline silicon for solar power equipment had been targeted. Second, the group of involved government offices is larger, suggesting that regulators are experimenting with additional policy routes and mechanisms to tackle overcapacity. Arguably the most striking feature of the most recent effort is how closely the composition of affected industries aligns with the group of sectors outlined in the PRC industry revitalization plans.
Impact on companies will vary

Suppliers or companies with clients operating in the targeted industry may experience disruptions in their supply chain. During times of severe overcapacity, producers, especially larger ones with high levels of liquidity, often sit on inventory and wait for market prices to rebound before selling—creating a product shortage that affects buyers and results in less demand for inputs from upstream producers.

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Targeted Industries for Curbing Overcapacity

PRC regulators are targeting the following energy-intensive and highly pollution industries to curb overcapacity: alcohol, calcium carbide, cement, chemical fiber, citric acid, coal-tochemicals, copper smelting, electrolytic aluminum, ferrous alloys, flat glass, iron, lead smelting, leather, monosodium glutamate, papermaking, printing and dyeing, steel, and zinc smelting.

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This article is adapted from a report that first appeared in China Market Intelligence, the US-China Business Council’s (USCBC) members-only newsletter. To find out more about USCBC member company benefits, see www.uschina.org/benefits.html. [/box]

Posted by USCBC